Treasury Yields Touch Recent Highs After Jobs Report -- Update
March 05 2021 - 1:22PM
Dow Jones News
By Sam Goldfarb and Paul J. Davies
Yields on U.S. government bonds swung sharply Friday after new
data showed a big jump in employment in February, creating more
optimism about the economic outlook and debate about the path of
interest rates.
In recent trading, the yield on the benchmark 10-year U.S.
Treasury note was 1.559%, according to Tradeweb. That was down from
1.626% right after the report but still up from 1.547%
Thursday.
Yields, which rise when bond prices fall, have been surging for
weeks based largely on investors' hopes for the near future, when
vaccines may have tamed the coronavirus pandemic even as the
government continues to pump money into the economy with various
stimulus programs.
Some solid economic data, though, has also helped -- the latest
coming Friday, when the Labor Department said that the economy
added 379,000 jobs in February, much more than economists had
anticipated.
Friday's move also comes a day after Fed Chairman Jerome Powell
made his own contribution to the selling in the bond market.
Appearing at The Wall Street Journal Jobs Summit, Mr. Powell
said the recent increase in Treasury yields had caught his
attention and suggested the Fed might intervene if overall
financial conditions tighten much further. But he didn't signal
that the Fed was anywhere close to buying more long-term Treasurys
each month in an effort to contain yields, as some investors had
thought was possible.
Mr. Powell has repeatedly said that the central bank will take a
more patient approach to tightening monetary policy than it has in
the past, indicating it won't raise rates until inflation can be
sustained at or above its 2% target and a range statistics indicate
that the labor market is at maximum strength.
Many investors, though, don't seem to fully believe or
understand the Fed's new policy, creating a challenge for the
central bank as yields rise.
"The problem the Fed has now is that the bond market is clearly
confused, " said Hugh Gimber, a strategist at J.P. Morgan Asset
Management.
He also said that the central bank will maintain ultralow
interest rates until its employment and inflation goals have been
met and that it is unlikely that the Fed's goal of maximum
employment will be reached this year.
Despite the sharp increase in Treasury yields, many analysts say
the Fed isn't likely to intervene in the market unless there is
more severe selling in riskier assets, such as stocks and corporate
bonds. Those play critical roles in determining the cost of raising
money for businesses and influencing sentiment.
Some analysts say there are important factors beyond the
economic outlook that are driving yields higher. One is the sheer
volume of new Treasurys that enter the market each month as the
government funds its efforts to fight the pandemic.
Another is uncertainty over whether the Fed will extend an
exemption allowing banks to hold less capital compared with the
size of their balance sheets, which is set to expire at the end of
the month.
The exemption enables large banks to exclude their holdings of
Treasurys and central bank reserves when working out how much
capital they need to meet a standard known as the supplementary
leverage ratio. The banks will need more capital to hit the same
ratio levels if the exemption is allowed to expire, and analysts
say they might do that by selling Treasurys.
Trend-following hedge funds have also contributed to the sharp
increase in yields. Such funds have placed their largest bets
against Treasurys since late 2016, according to David Bieber,
quantitative analyst at Citigroup, having added to their positions
significantly since last week's volatility.
This increase in bets on rising yields in futures markets has
been accompanied by heavy selling of Treasurys among other
leveraged investors in so-called risk parity funds, which balance
stock and bond investments depending on market volatility.
But these extreme moves in investment positioning could mean
yields are primed to fall back again as soon as these two important
sources of Treasury demand decide yields have risen enough and so
unwind their positions.
"When leveraged, trend-following funds have had very extreme
short positions in rates going back to 1990, there has been a rally
in rates -- which means falling yields -- in the period after," Mr.
Bieber said.
Caitlin Ostroff contributed to this article.
Write to Sam Goldfarb at sam.goldfarb@wsj.com and Paul J. Davies
at paul.davies@wsj.com
(END) Dow Jones Newswires
March 05, 2021 13:07 ET (18:07 GMT)
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